Mr Dean Nalder; Ms Mia Davies

Extract from Hansard [ASSEMBLY — Wednesday, 19 June 2019] p4334c-4340a Mr Bill Johnston; Mr Dean Nalder; Ms Mia Davies PILBARA ELECTRICITY REFORMS — HORIZON POWER Statement by Minister for Energy MR W.J. JOHNSTON (Cannington — Minister for Energy) [12.11 pm] — by leave: I would like to bring to the attention of the house important matters relating to Horizon Power and the Pilbara electricity reforms. The Pilbara electricity reforms have been foreshadowed for many years. They are intended to bring competition to industrial electricity consumers in the Pilbara. This is designed to create the potential for lower industrial energy costs and more opportunities for renewable and other new energy technologies in the Pilbara. These reforms were first discussed during the time of the Carpenter Labor government. They were later revived by the member for Riverton when he was the Minister for Energy during the second Barnett Liberal government. The member for Victoria Park worked on the reforms as Minister for Energy as part of the McGowan Labor government, and I am now moving to implement these reforms, with an intended start date of 1 January 2020. However, in progressing these reforms, we have discovered a serious impediment to finalising the reform agenda. This impediment is the decision by the member for Riverton and the former Liberal government in July 2014 to require Horizon Power to enter into a high-cost, unsustainable contract for an “off-balance sheet” contract for power station capacity in South Hedland. This bad decision has raised costs for Horizon Power, and therefore the taxpayers of WA. Horizon Power is bound to this bad decision until 2042. This contract means that Horizon Power is locked out of using renewable energy for this long period, despite the fact that the Pilbara is arguably the best place in the world for renewable energy. It is important to put on record what we know about this appalling decision. Horizon Power’s Pilbara network provides electricity for businesses and households in the Pilbara. In respect of Horizon Power’s supply of electricity to households and small businesses in the Pilbara, it is well understood that the cost of supply far exceeds the price charged to consumers, and the costs are made up by a subsidy known as the tariff equalisation contribution. The tariff equalisation contribution, also called TEC, is paid for by households and small business consumers in the south west interconnected system—that is, the consumers largely supplied by Synergy. This means, in effect, that any increase in costs for Horizon Power are passed on to Synergy’s customers. This subsidy is important for keeping electricity prices in the Pilbara at a reasonable level. However, there is no such thing as free money— additional costs are paid for by someone. In respect of Horizon Power, extra costs are paid for by Synergy consumers. Therefore, it is the responsibility of the Minister for Energy to keep the costs of operating Horizon Power as low as possible. By way of background, Horizon Power advised the Barnett Liberal government in about 2009 that there was a foreshadowed shortfall in energy capacity for the summer of 2012–13. Horizon Power asked the Liberal government for authority to build a power station to meet this shortfall. This authority was not given. It is important to understand that the shortfall of energy did not arise. Despite no additional generation being commissioned, there were no shortages in power as the demand forecasts were too high. Although the Liberal government did not authorise the construction of a power station, for some bizarre reason, Horizon Power was authorised to build a switchyard in South Hedland, at a cost of over $138 million. It is important to understand that the only reason a switchyard is built is to allow the connection of a power station. This means that the Liberal government had refused to sanction the construction of a power station, but nonetheless authorised the construction of a switchyard that only had value if there were a power station to which it was connected. From this point on, Horizon Power was placed on the pathway to building a power station at the South Hedland location, despite the fact that the Liberal government had rejected the request of Horizon Power to build this power station. In 2012, Horizon Power was authorised by the Liberal government to secure a “temporary power generator”, by spending operational expenses, rather than capital expenditure, for this purpose. These costs were therefore passed through to Synergy customers in the south west of the state through TEC. Notwithstanding that this was a temporary power station, the chief executive officer of Horizon Power told the estimates committee on 22 August 2013 — Although we say that it is temporary, if the member went and looked at the facility, he would see that it looks pretty permanent, and from an engineering point of view it is a nice piece of work. Despite the fact that this power station was complete and operating, the Liberal government did not consider retaining this facility as an option. All the costs of installing this station were therefore lost, and the flexibility in the contracting arrangements associated with it were not available to Horizon Power. Notwithstanding this decision, the Liberal government established a separate process to replace this power station with another power station at the same location. At this time, Horizon Power wanted to build, own and operate the new power station. However, the former government directed Horizon Power to instead participate in a procurement process to obtain the capacity through an off balance sheet power purchase agreement with a private provider. It appears that the primary driver for this approach was to obtain access to the generating capacity without disclosing the very [1] Extract from Hansard [ASSEMBLY — Wednesday, 19 June 2019] p4334c-4340a Mr Bill Johnston; Mr Dean Nalder; Ms Mia Davies significant increase in the state’s long-term liabilities to the people of Western Australia. In other words, this was to hide from Western Australians the true extent of the former government’s spending binge. The former government announced the outcome of this procurement process in July 2014; namely, the construction of a 150-megawatt gas-fired power station at South Hedland. The construction of the power station was underpinned by a 25-year, 110-megawatt agreement with Horizon Power, with a total cost in excess of $1 billion. The remaining capacity was to be taken up by a mining company. Important for an understanding of the true extent of this bad decision is recognising that this contract was not for the purchase of electricity. This contract was for access to the capacity of the power station. To generate electricity, Horizon Power must provide its own gas to the power station so that electricity can be produced from that gas. As a result of the off balance sheet criterion stipulated by the former government, the power station was funded at private sector financing rates, which have substantially increased the cost. It was also a government requirement that the contract transfer ownership of the Horizon Power–owned switchyard to the private provider, even though this was never part of the original plan. In effect, the Liberal government required the successful bidder to purchase the switchyard that had been built at a cost of $138 million—and then the Liberal government agreed to buy the switchyard back over the 25 years of the operation of the power station. This resulted in the cost of the switchyard being recovered by the private provider from the state at a private sector rate of return over the life of the contract. This effectively doubled the cost of the switchyard. This is a substantial and unnecessary additional cost that does not appear to provide any benefit to the state. It is a bizarre effort by the former Liberal government to shift debt off the balance sheet, and hide a significant extra expense of Horizon Power, and therefore shift it onto ordinary household electricity customers of both Horizon Power and Synergy. From the start, this decision appears to have been fraught with errors and omissions. The expected increase in demand in the Pilbara electricity system has not materialised. In fact, demand is lower today than it was in 2012. Leaving aside the forecasting issues, a number of potential options for dealing with the projected capacity shortfall do not appear to have been adequately considered. For example, the option to continue or expand existing supply arrangements with Alinta Energy do not appear to have been seriously considered and the option of retaining the temporary generation facilities was never considered. These options were potentially the lowest cost options available and they certainly would have provided more flexibility and reduced risk compared with the option ultimately chosen. Nowhere in the process does there appear to have been consideration of the opportunities for low-cost renewable energy. The value of flexibility does not appear to have been considered. Locking Horizon Power into a 25-year contract means that there is no flexibility to respond to changing circumstances. As the contract is for access to generation capacity rather than the generation of electricity, there is absolutely no risk transfer to the private sector. The use of the off-balance-sheet model means that the finance cost is more than double the rate available to Horizon Power. Even taking account of the incredible list of errors, the former Liberal government went even further in failing to protect the interests of Western Australians. Two companies bid for the South Hedland power purchase contract and Horizon Power evaluated the two bids.

Load more